2009 Index of Economic Freedom

Quick Facts

Population:

• 70.1 million

GDP (PPP):

• $694.4 billion
• 5.8% growth
• 6.0% 5-year compound annual growth
• $9906 per capita

Unemployment:

• 12.0%

Inflation (CPI):

• 17.5%

FDI Inflow:

• $901.1 million

Iran's economic freedom score is 44.6, making its economy the 168th freest in the 2009 Index. Its score decreased by 0.4 point from last year, partially reflecting improvements in business freedom offset by slippage in five other components of economic freedom. Iran is ranked 16th out of 17 countries in the Middle East/North Africa region, and its overall score is below the world average.

Iran's self-defeating protectionism and price controls have led to double-digit inflation. The economy has no strong economic institutions and scores better than the world average only in terms of fiscal freedom and government size.

Trade freedom, monetary freedom, investment freedom, financial freedom, property rights, and freedom from corruption are all weak. Business licensing and closure are regulated heavily by an intrusive and highly inefficient bureaucracy. High tariff rates and non-tariff barriers impede trade and foreign investment. Corruption is rampant, and fair adjudication of property rights in a court of law cannot be guaranteed. Resistance to privatization is high. The oil sector, the most important part of Iran's economy, accounts for nearly 50 percent of the government budget and remains almost entirely state-owned.

Background Back to the top

Iran’s economy, once one of the most advanced in the Middle East, was crippled by the 1979 Islamic revolution and the Iran–Iraq war, and the country continues to suffer from chronic economic mismanagement and corruption. International concern about Iran’s support for terrorism and its nuclear development activities remains high and has resulted in economic sanctions against the country. Mahmoud Ahmadinejad, who became president in 2005, halted tentative efforts to reform the state-dominated economy and has greatly expanded government spend-ing. High world oil prices have significantly boosted oil export revenues, which provide about 85 percent of government revenues, but Iran’s economy remains burdened by high unemployment, rising inflation, corruption, costly subsidies, and an increasingly bloated and inefficient public sector.

Business Freedom 60.6 Back to the top

The overall freedom to start, operate, and close a business is limited by Iran's regulatory environment. Starting a business takes an average of 47 days, compared to the world average of 38 days. Obtaining a business license takes 670 days, compared to the world average of 225 days. Closing a business is difficult.

Trade Freedom 57.4 Back to the top

Iran's weighted average tariff rate was 13.8 percent in 2004. Import bans and restrictions, high tariffs and import taxes, export licensing requirements, restrictive sanitary and phytosanitary regulations, burdensome customs procedures, government control of imports, arbitrary changes in tariff and tax schedules, and weak enforcement of intellectual property rights add to the cost of trade. Fifteen points were deducted from Iran's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 81.0 Back to the top

Iran has a high income tax rate and a moderate corporate tax rate. The top income tax rate is 35 percent, and the flat corporate tax rate is 25 percent. All property transfers are subject to a standard tax. A value-added tax (VAT) has been collected on a probationary basis. In the most recent year, overall tax revenue as a percentage of GDP was 7.3 percent.

Government Size 79.7 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 26 percent of GDP. More than 500 companies are state-owned, and about 1,000 are semi-public.

Monetary Freedom60.1 Back to the top

Inflation is very high, averaging 15.5 percent between 2005 and 2007. The government controls the prices of petroleum products, electricity, water, and wheat for the production of bread; provides economic subsidies; and influences prices through regulation of Iran's many state-owned enterprises. Fifteen points were deducted from Iran's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom10.0 Back to the top

Foreign investment faces considerable government hostility, and the state remains the dominant force in the economy. Foreign investment is restricted or banned in many activities, including banking, telecommunications, transport, oil, and gas. All investments must be approved, and the approval process is not straightforward. The method of calculating the maximum share that foreign-owned entities are allowed (foreign market share should not exceed 25 percent in any one sector or 35 percent in individual industries, except for goods and services, other than crude oil, for export purposes) can be non-transparent. The parliament can veto projects in which foreign investors have a majority stake. Political unrest and uncertainty over international sanctions further deter investment. Most payments, transfers, credit operations, and capital transactions are subject to limitations, quantitative limits, or approval requirements.

Financial Freedom10.0 Back to the top

Iran's financial sector remains heavily influenced by the government. All banks were nationalized following the 1979 revolution, but six private banks have come into operation since then. These small private banks operate under strict restrictions regarding de facto interest rates and capital requirements. Stringent government controls have kept the banks' lending scope from expanding, limiting access to financing for businesses. There are six state-owned commercial banks and three state-owned specialized financial institutions. State banks account for over 95 percent of banking assets. The government directs credit allocation, though credit is often supplied by traditional money lenders in the bazaar in support of small cash-based businesses. All insurance companies were nationalized during the revolution, and the sector remains dominated by five state-owned companies. Capital markets are not fully developed.

Property Rights10.0 Back to the top

Resorting to the courts is often counterproductive; finding an influential local business partner with substantial political patronage is a more effective way to protect contracts. Few laws protect intellectual property; computer software piracy is extensive; and infringement of industrial designs, trademarks, and copyrights is widespread.

Freedom From Corruption25.0 Back to the top

Corruption is perceived as widespread. Iran ranks 131st out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Graft is extensive, and the anti-corruption agency has fewer than 1,000 inspectors to monitor the 2.3 million full-time civil servants and numerous government contractors who control most of Iran's economy.

Labor Freedom52.4 Back to the top

Iran's restrictive labor regulations hinder employment opportunities and productivity growth. The non-salary cost of employing a worker is high, and firing a worker requires approval of the Islamic Labor Council or the Labor Discretionary Board. Regulations on the number of work hours are very rigid.